How to Do Away with the Dangers of Outsourcing

The collapse of the Rana Plaza garment factory in Bangladesh should be a warning to companies that embrace outsourcing, says Professor Ranjay Gulati.

by Ranjay Gulati

The recent collapse of the eight-story Rana Plaza garment factory in Bangladesh was a red alert for every company that has embraced the "virtual organization" model and the outsourcing that goes with it.

The lure of the model is obvious. Virtual corporations shrink the core activities they pursue internally, while relying heavily on outsourcing many of those activities to strategic partners. At the same time, they seek to increase the number and nature of product offerings, many of which are also offered by their partners. As a result, traditional corporate boundaries disappear. Staffing, risks, benefits, and regulatory compliance are all increasingly externalized, most often to parts of the world where need routinely trumps prudence.

Rather than manage their own corporate assets, CEOs and other top executives of such corporations are confronted with the seemingly easier challenge of managing relationships with "partners" or "associates." Yet as the Rana Plaza disaster and too many other examples show, every outsourced stop along the supply and production chains holds the potential for tainting the mother ship, exposing it to litigation and diminishing the quality and even viability of its offerings.

Outsourcing Has Its Costs

Just ask Boeing. No firm placed a bigger bet on the virtual organization model. Its new 787 Dreamliner was going to be the UN of manufactured goods: German-made cabin lighting, Swedish cargo doors, South Korean wing tips, and on and on—a coalition of associates that spanned the earth and in the end proved nearly as dysfunctional as the real United Nations often seems. Outsourcing woes cost the 787 an estimated three extra years of development, required Boeing to bring numerous suppliers inside the company, and culminated in a lithium-ion battery so deficient that the entire nascent fleet of 787s had to be grounded shortly after launch.

Boeing's scale was epic, but these problems are far from new. Nike, Foxconn, and a host of others have suffered similar public embarrassments. Such incidents, though, are rising in frequency and complexity as the virtual model spreads and takes root. Apple is in the extraordinarily uncomfortable position of suing one of its major suppliers, Samsung, for alleged patent infringement. And now, with Rana Plaza and its 1,100-plus dead, we have reached a high-water mark in the human cost of rampant outsourcing.

"Every outsourced stop along the supply and production chains holds the potential for tainting the mother ship”

What to do? Certainly, the newly announced plan by a coalition of clothing retailers, including many of the biggest names in the business, to fund fire- and building-safety improvements in Bangladesh is an important first step—and a vital recognition of responsibility, especially given the reluctance of so many garment-factory owners in Bangladesh to make necessary changes on their own. But this cannot be a one-time solution because we are not facing a one-time problem or a one-industry or one-nation crisis.

If firms are going to continue to operate in an outsourced world—and there's no inherent reason they should not—they need to find a more systematic way of thinking about when to move business beyond their own boundaries and when not to, and how to more carefully monitor (and when necessary ride herd on) the partners on whom their virtual model depends. And they need to drive this process deep into their supply and production chains.

One useful framework for accomplishing this can be found in a surprising place: the seminal work of psychologist Diana Baumrind on parenting styles.

Her research highlights four parenting "prototypes" oriented along two dimensions: the level of direction parents demonstrate to their children and the levels of warmth and support. Low levels along both dimensions result in what Baumrind calls "neglectful" parents. High levels of direction coupled with low levels of support produce "authoritarian" parents—what in an organizational context most closely resembles the old command-and-control structure—while high levels of support coupled with low direction lead to very lenient, "permissive" parents who demand little from their children and bestow too much freedom, analogous to the see-no-evil approach so prevalent with global outsourcing.

The Authoritative Solution

Baumrind's fourth prototype, "authoritative," offers organizations a valuable path between the traditional top-down, inside-the-tent corporate structure and unbridled license to suppliers to do as they want. Marked by high levels of direction and support, this approach offers children—and by extension corporate partners and associates—freedom within a well-defined structure.

The authoritative style is both demanding and responsive. It encourages in equal measure entrepreneurial action and healthy self-regulating behavior. Like authoritative parents, authoritative virtual corporations resist the temptation to micromanage relations with their associates. At the same time, they never leave responsibility for work conditions in the hands of their partners or cede decisions on quality control.

Implemented with care, this freedom within a framework sharpens and transforms value creation and innovation. It sets the rules that let outsourcing partners be more creative, efficient, and customer focused. It also enables faster response to shifts in the market—something especially important as innovation continues to flow globally, rapidly, and often from unknown sources.

Most important, this framework helps assure that virtual corporations will be anticipating crisis moments instead of responding to them. Stakeholders at either end of the spectrum, from seamstresses to stockholders, deserve no less.

Kate Vitasek

Faculty, Center for Executive Education, University of Tennessee

Good post. As with all things - companies (like people) learn from their mistakes AND by seeing what IS working. Our research at the University of Tennessee on the topic of Vested Outsourcing has centered around HOW to make the outsourcing work - really well. The Vested mindset VERY MUCH follows the "authoritative" style outlined in this article. If you are not familiar with our work - we have four books on the topic - all available on Amazon. Start by reading about those that have done fabulous jobs with some of their relationships which we profile in the book Vested: How P&G, McDonald's and Microsoft are Redefining Winning in Business Relationships.

The Vested methodology teaches HOW to do outsourcing RIGHT. Don't throw out the baby with the bathwater - instead get it right.

The examples of Rana Plaza and Boeing just reinforce that Outsourcing can't be treated as a 'fire and forget' missile, you need a well thought out 'Governance Structure' that controls for risk and creates value. The Vested approach that Kate Vitasek mentions earlier in these comments contains governance as one of its five foundation rules to getting outsourcing right. Well worth a look if you are interested in getting outsourcing to work for you!

Kapil Kumar Sopory

Company Secretary, SMEC(India) private Limited

Outsourcing seems to some as a solution for shifting the burden of managing matters internally to external providers at costs which may seem to be less. And the problems of managing own staff be done away with. However, in my view, no going concern with vision of long-term growth should venture to outsource key activities, finance and HR for example. Yes, administrative functions - maintenace of premises, canteen facilities, vehicles, and such like jobs which do not have serious legal implications may be outsourced.
Hence, only very prudent and selective outsourcing is recommended to avoid the type of what happened in the garment factory in Bangla Desh.

Ray Tapajna

Editor and Artist, Tapsearch Com World

Free trade is not trade. It is primarily about moving production from place to place anywhere in the world for the sake of cheaper labor. A few years ago the President of Fruit of Loom said, even if he paid his workers nothing in the U.S., the company could not make it the U.S.

Free trade has failed for more than a generation now and is the main cause behind our economic crisis. The term outsourcing evolved years after free trade was initiated and hid the core definition of what free trade really is. It is not trade as historically practiced and defined. It divorced investments from production where investments ruled the game at the expense of the value of workers and labor. This value has been degraded and deflated to a point where nothing adds up anymore. It represents trillions of dollars in value lost forever. Our economies based on making money on money instead of making things and adding values to recycle and economy are burning out.
We have outsourced real value behind our economy with the value of workers and labor being a better money standard than the funny money the Feds create out of nothing. http://tapsearch.com/bewildered-global-economy

Penny Breslin

Consultant, MoneyPenny, LLC

Nice post. The authoritative model is the best option. Too many times the organization outsourcing begins to withdraw from checking and verification once the providers process fully syncs with their own. All things change, people, process and directions. It behooves the the organization outsourcing to set up regular and consistent checks to make sure the on-going relationship with the provider stays within the agreed upon service levels. This provides benefit to both as subtle changes in needs and behavior on either side can be quickly interpreted and adjusted. This not only makes sure the sending organization is still benefiting from the engagement but also allows for checks on systems that sometimes default to the path of least resistance when time and distance make it easy to ignore.

Paternostre

Global Account Director, Outsourcing Leader

Nice concepts but pretty distant from reality in services outsourcing.
Outsourcing stakeholders (buyers, advisors, service providers...) have worked together to define the needed framework to ensure that the fundamentals are covered.
Most difficult situations I've seen are the ones where "parents" try to impose their own framework and controls which most of the time are suboptimal to the development of their children.
Adhering to a framework proposed by a coalition of peers (parents or buyers), teachers (or service providers) and advisors (or counselors) is delivering optimal results.

Rohit Prabhakar

Ranjay, With most of my career spent in outsourced and offshored projects I completely agree with you. In my experience most of my projects that were sucessfull had authoritative style. In some places it was strong while in others it was average but in each and every case the client was not just interested in the finished product but in the team and how the company runs. Ever year we had the sutomer visting us to understand our culture and environment and at the same time to transfer their team and company culture to us. Outsourcing and especially offshoring can never be fire and forget projects. Every time I see some big outsorcing failure, my first response is "did you hired them and forgot them?"

Ashraf Abdelmoteleb

Strategic Investment Executive

I think the article has many merits but talking about outsourcing as a homogeneous item is like describing sets of rules for strategy or innovation. Nice in theory but the devil is in the detail.

I spent 12 years between outsourced strategy consulting and new product development and when I get asked would your recommend outsourcing, my answer will be "No" except where is a good justifiable reason to do so. The reason for my answer is simple, if you can't manage internal activities well, then you are not likely to manage outsourcing well. Outsourcing can bring value, but to extract that value requires a certain level or organisational maturity that is not present in a dysfunctional organisation.